The industry practice of charging interest on defaulted auto loans is the subject of a lawsuit in Missouri, and powersports lenders should take note, David Gemperle, partner at Nisen & Elliot, told Powersports Finance.
“There’s an assertion that you don’t have the right to contract interest after the default,” Gemperle said. “Probably the theory is wrong, so I’m not super concerned, but there’s a challenge to a practice that everybody in the whole powersports industry does, which is keep the contract interest accruing if somebody misses a payment.”
In the Missouri case, borrower Nicole Bell defaulted on a loan she obtained through GM Financial. When Bell failed to cure the default, GMF mailed her a notice of its intent to sell the vehicle. After the vehicle sold at auction, GMF sent a post-sale notice and sued Bell for the deficiency balance.
The Circuit Court of Jefferson County granted Bell’s motion to dismiss the suit because it found that GMF’s pre- and post-sale notices “violated Missouri’s adopted version of the Uniform Commercial Code,” according to the order.
For powersports lenders, a critical element of the case is that GMF’s presale notice was allegedly misleading because it charged and accrued interest after the default but before final judgment was assigned, which is a violation of state law.
Essentially, the court is saying that the lender didn’t follow the “proper reasonable procedures” for the notice because Bell would not be liable for the interest , Gemperle added. “It’s seemingly a pretty minor violation, but you can trigger a ton of liability because of the strict interpretation of the Uniform Commercial Code,” he said.
Other alleged violations include specific language that was used in the notices, such as mislabeling how the vehicle would be sold and writing that money from the sale may increase the amount owed. Money from the sale can only decrease the amount owed, according to the order.
The case has been certified as a class but a judge has not yet been assigned, Gemperle said.